Woolworths
and US home improvement giant Lowe’s could accumulate heavy losses over the next four years unless they change the format at their “female friendly" Masters stores to boost sales and reduce costs, according to a report.

Mr Dart believes the Masters female-friendly format – with bright lighting, polished floors and a wide range of decor products – is alienating tradesmen and serious DIYers amid soft conditions in the home building and renovation markets.

Woolworths has slammed the analysis by Madison Cross, which advises major industry players including hardware rival Bunnings.

AFR
AFR

The report estimates that Woolworths’ joint venture with Lowe’s lost $104 million in 2012 and forecasts losses will mount annually before peaking at $237 million in 2016.

“They need to get the trade business going, cut costs and try to align the product offer to serious DIYers," Mr Dart told The Australian Financial Review after releasing the firm’s 2012 hardware industry report.

His detailed analysis of Woolworths and Lowe’s store numbers, revenues, gross margins, supply chain, labour, leasing and marketing costs suggests the hardware venture could lose $151 million this year, $179 million in 2014, $198 million in 2015 and $237 million in 2016 – almost $800 million over four years.

However, Woolworths chief executive Grant O’Brien is confident the new business will break even at a group level in 2015, seven years after Woolworths announced its foray into the $42 billion sector and four years after the first Masters stores opened.

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“This analysis is not correct," a Woolworths spokeswoman said yesterday. “As stated at our latest profit result, we’re hitting our targets. We are pleased with progress of our home improvement stores to date and we are very confident in the outlook for the business for customers and our shareholders."

Woolworths has warned the new business will drag on earnings for the next few years, but has not released sales and margin targets, leaving analysts struggling to assess the viability of the venture. Madison Cross fears the venture may not break even until 2020.

Losses will accelerate as more Masters stores open because of rising labour and leasing costs. Its analysis assumes annual sales of about $22 million for each Masters store and gross margins around 25 per cent, well below Lowe’s gross margins of 35 per cent in the US.

Woolworths, however, believes new Masters stores will help defray head office and supply chain costs. It has opened 22 stores to date and plans to open 15 to 20 a year after securing 112 of 150 proposed sites.

Madison Cross also says that as the big-box Masters chain expands, the profitable Danks wholesale business, which Woolworths and Lowe’s bought for $88 million in 2009, is shrinking. Danks’ Home hardware store numbers have fallen from 581 in 2010 to 518 in 2012 as independent retailers close, switch to Mitre 10 or are bought out.

Madison Cross expects big-box retailers to lift their share of the market from 16 per cent to 21 per cent over the next 10 years at the expense of independents, whose share will fall from 29 per cent to 16 per cent.